Hm, I just downloaded an Order History Report and see I have spent more than $100 on Amazon shipping for each of the past seven years running. I blanch at the thought of paying money for the privilege of shopping, but we use the Costco Executive 2% reward check to pay for our Costco Executive membership, so I should do what the math says. Oh wait, the free shipping promotion was in a separate column. Subtracting that out, I have never paid $100 for Amazon shipping in one year, I pay about $47 in an average year, including to third-party sellers.

Why are so many people paying for Prime?

Anyway, the reason Amazon is winning is because of its extreme dogfooding.

each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition.

While there are usually some compelling cost savings to be had from vertical integration (either through insourcing services or acquiring suppliers/customers), the increased margins typically evaporate over time as the “supplier” gets complacent with a captive, internal “customer.”

Amazon has committed to this idea at a granular level. Even when it comes to services that can’t be sold, Amazon is still making a push to expose the services externally. The perfect example of this is Amazon’s Marketplace Web Service (MWS) API — this is the set of services that Amazon Marketplace sellers can use to programmatically exchange data with Amazon. Amazon built out a service that they call the “Subscriptions API,” which gives the seller instant notification of any price change by any competitor — including Amazon itself!

Mackey’s misunderstanding was more subtle, and more profound: while the iPhone may be the most successful product of all time, Amazon and Jeff Bezos have their sights set on being the most dominant company of all time. Start there, and this purchase makes all kinds of sense.

Presumes that the purchase of Whole Foods advances this goal. No effort has been made by the author to defend the idea that owning Whole Foods will in any way aid Amazon in being the most dominant company of all time; it is presented as a maxim unworthy of investigation.

This, then, is the mistake Mackey made: while he rightly understood that Amazon was going to do everything possible to win in groceries — the category accounts for about 20% of consumer spending — he presumed that the effort would be limited to e-commerce.

The "mistake" Mackey made was presuming that Amazon wouldn't pay a 50% premium for a boutique food operation with slowing growth, collapsing profit margins and an inability to distinguish itself in an increasingly-crowded marketplace. He came out on the upside in that particular "mistake."

This, though, is why groceries is a strategic hole: not only is it the largest retail category, it is the most persistent opportunity for other retailers to gain access to Prime members and remind them there are alternatives.

It's also the one segment where individual products are not interchangeable. One salmon fillet is not as good as any other salmon fillet. One apple is not the same as any other apple. Sysco's dominance of the commercial food distribution system is so complete that when they tried to merge with US Foods the FTC shut them down on anti-trust concerns; if anyone could break into home delivery of groceries it would be Sysco. They have one retail outlet. Their sales are done through commercial accounts, commercial representatives, and a b2b relationship that does not scale to individual retail.

That is why Amazon has been so determined in the space: AmazonFresh launched a decade ago, and unlike other Amazon experiments, has continued to receive funding along with other rumored initiatives like convenience store and grocery pick-ups. Amazon simply hasn’t been able to figure out the right tactics.

That Amazon has purchased Whole Foods does not indicate they have suddenly figured out the right tactics.

As I noted in that piece, you can see the outline of similar efforts in logistics: Amazon is building out a delivery network with itself as the first-and-best customer; in the long run it seems obvious said logistics services will be exposed as a platform.

...Amazon's "logistics" are "bring people in off the street and pay them $11 an hour to drive around losing packages and not getting them there on time." Truly. They made FedEx a dominant force by giving them a lot of business, then raised OnTrac by giving them a cheaper contract than Fedex was willing to buy, then smurfing around like lo-rent Uber drivers when even OnTrac refused their prices. Amazon's approach to "logistics" is "if we cut margins enough we can afford to lose a disturbing percentage of deliveries and still profit." This is not a model that rewards a failure to provide me a half-gallon of whole milk so my daughter can enjoy her rice crispies.

This is the key to understanding the purchase of Whole Foods: from the outside it may seem that Amazon is buying a retailer. The truth, though, is that Amazon is buying a customer — the first-and-best customer that will instantly bring its grocery efforts to scale.

...so the author's argument is that people would buy Amazon Fresh groceries if only they could buy them at Whole Foods? That the best way to increase the margins of Amazon Fresh to profitability is to make Whole Foods pay them? That an additional payments layer between vendor and customer is going to increase profitability somehow? Hey, I guess if you bury it eight paragraphs down it's more likely to pass the sniff test.

In the long run, physical grocery stores will be only one of Amazon Grocery Services’ customers: obviously a home delivery service will be another, and it will be far more efficient than a company like Instacart trying to layer on top of Whole Foods’ current integrated model.

Safeway already does this. It isn't exactly setting the world on fire. But apparently when Amazon does it, it will because Amazon.

Whole Foods was worth $8 billion until Amazon overpaid $5 billion for it. Sysco is worth $27 billion. If Amazon wants that business it'll have to try harder than assuming restaurants are gonna sign up for Amazon Fresh.

unlike Whole Foods Amazon has no particular desire to be a grocer, and contrary to conventional wisdom the company is not even a retailer. At its core Amazon is a services provider enabled — and protected — by scale.

Presumes scale is always an advantage.

Indeed, to the extent Waterloo is a valid analogy, Amazon is much more akin to the British Empire, and there is now one less obstacle to sitting astride all aspects of the economy.